Engineering Economic Analysis

Economic Criteria

Method of Analysis

,,--PRESENT WORTH

ANNUAL CASH FLOW

FUTURE WORTH

BENEFIT-COST RATIO

RATE OF RETURN

Fixed Input Neither Input Nor Output Fixed

Maximize (PW of Benefits-PW of Costs),

or Maximize Net Present Worth

Fixed Output

Maximize

PW of Benefits

Minimize

PW of Costs

Maximize

Equivalent

Uniform Annual

Benefits (EUAB)

Minimize

Equivalent

Uniform Annual

Cost (EUAC)

Maximize (EUAB-EUAC)

Maximize

FW of Benefits

Maximize (FW of Benefits-FW of Costs),

or Maximize Net Future Worth

Minimize

FW of Costs

Two Alternatives: Compute the incremental

Benefit-Cost ratio (tlB/tlC) on the

increment ofinvestmentbetween the

alternatives. IftlB/tlC :::: 1, choose

higher-cost alternative; if not, choose

lower-cost alternative.

Three or more Alternatives: Iricremental

analysis is required (see Ch. 9)..

Two Alternatives: Compute the incremental rate of return(tlROR) on the increment of

investmentbetween the alternatives. IftlROR ::::minimum attractive rate of return,

choose the higher-cost alternative; if not, choose lower-cost alternative.

Three or more Alternatives: Incremental analysis is required (see Ch. 8).

Maximize

Benefit-Cost

Ratio

Maximize

Benefit-Cost

Ratio

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